Facing health insurance premium hikes, Obama administration eyes price controls

In a shot across the bow to the insurance industry Tuesday, President Obama warned companies facing higher costs in part because of his health care law not to hike their prices, saying “we’ll be watching closely.”

Backing up his rhetoric behind the scenes, the Department of Health and Human Services (HHS) is quietly working on a new regulation to determine when insurance price increases are “unreasonable” and potentially prohibited by law.

The move may provide political cover heading into November’s elections as the President tries to keep the public from linking recent premium hikes to his newly-passed health care law.

But critics warn price controls could lead to either rationing or insurance companies going out of business, and point to Massachusetts’s experience with insurance price controls as a cautionary tale of what happens when pricing “turns political.”

Proponents, meanwhile, say without strict controls, the design of the health care law will lead to dramatic premium spikes. They also point to California regulations on automobile insurance as an example of where insurance price controls have been successful.

State regulators May 12 floated ideas to HHS about how to best institute the controls. The states said HHS should establish a set of criteria to flag price increases as “potentially unreasonable,” leaving HHS Secretary Kathleen Sebelius to make a final decision on whether a price hike is justified.

“The process should identify ‘potentially unreasonable’ increases, with further review . . . to determine any mitigating or exacerbating factors and decide whether the increase is actually unreasonable,” the National Association of Insurance Commissioners said.

The issue is complicated because under the health care law, HHS does not have the authority to simply deny premium hikes. A slew of states already have that power, and HHS has significant leverage over how states implement the reasonableness review in doling out $250 million in grants for its implementation.

The federal government has often used such funds to require states to implement additional provisions, and proponents of strict price controls are urging HHS to have states require “prior approval” of insurance rate hikes to accept the money.

“In the absence of a federal mandate for prior approval regulation,” activist group Consumer Watchdog said, “HHS should use section 2794’s grants to encourage states to adopt the most effective rate approval process available, prior approval rate regulation.”

The combination of federal and state authorities, in its own byzantine way, could eventually comprise price controls of insurance premiums, proponents hope and critics fear.

HHS spokeswoman Jessica Santillo said under the health care law “insurers will be required to publicly justify the kind of unreasonable rate increases that have made coverage unaffordable for so many American families.  Reviewing rate increases will go a long way toward ensuring that consumers finally get the value they deserve for their premium dollar and this new transparency in the health insurance market will encourage insurers to do more to control health care costs.”

In Massachusetts, Democratic Gov. Deval Patrick’s administration implemented strict price controls on insurance premiums under that state’s health care law,

Obama’s health care plan is in many ways based on the Massachusetts law, and Patrick shares with Obama a top political advisor in David Axelrod.

However, Massachusetts’s price controls did not work out as planned. E-mails later showed top state officials warning the controls would have adverse consequences, including undercutting the solvency of the state’s insurance companies.